Silver vs Gold Miners: Valuation Dislocations
Many readers probably know that I have been quite vocal about my distaste for most silver companies (especially producers) over the last couple of months. This is based on both absolute but especially relative valuations versus the gold miners. I thought I would just make a quick post which should make it abundantly clear why I think most gold miners have way better risk/reward at the moment…
First Majestic: C$1.97 B
2020 Guidance Silver Eqv (Moz): 21.5-24.0
- Gold: 114 Koz – 126 Koz = Max $205,506,000 in revenue at today’s gold price
- Silver: 11.8 Moz – 13.2 Moz = Max $192,720,000 in revenue at today’s silver price
Total Revenue at today’s silver and gold price (MAX guidance): $398,226,000
MCAP/Revenue: 4.95
Reserves: 160 Moz Ag Eqv as of 2018 = 1.43 Moz Au Eqv (Note that Ag Eqv calculation used by First Majestic and current Au/Ag ratio differ!)
Equinox Gold: C$1.98 B
2020 Guidance Gold Koz: 700 = 79.3 Moz Ag Eqv
Revenue at today’s gold price: $1,141,700,000
MCAP/Revenue: 1.73
Reserves: 12.7 Moz Au = 1,419,869,000 Ag Eqv
Ag/Au ratio needed for First Majestic and Equinox revenues to match (based on Ag Eqv production): ~47 (it’s currently at 111.8)
You can actually buy both IAMGOLD and OceanaGold for a little more than First Majestic’s Market Cap ATM…
IAMGOLD: C$1.55 B
16.7 Moz Au reserves = 1,867,060,000 Ag Eqv
2020 Guidance Gold production: 700 Koz – 760 Koz = 78.3 – 85.0 Moz Ag Eqv
2020 AISC Guidance: $1,100-$1,150
OceanaGold: C$903 M
5.6 Moz Au reserves (+140 kt copper) = 626,080,000 Moz Ag Eqv (Excluding copper!)
2020 Guidance Gold production: 360 Koz – 380 Koz = 40.2 Moz – 42.5 Moz Ag Eqv
2020 AISC guidance: $1,075-$1,125
Combined:
2020 Production Guidance: 1.06 – 1.14 Moz Au = 118.0 Moz – 127.5 Moz Ag Eqv
Reserves: 22.3 Moz Au = 2,496,000,000 oz Ag Eqv (2.5 Boz Ag Eqv)
… Versus First Majestic’s guidance of 21.5-24.0 Moz Ag Eqv and 160 Moz Ag Eqv in reserves. Then add the diversification benefits from having many more mines in many different jurisdictions etc. Oh, and both IAMGOLD and OceanaGold should be making good money at the moment with the gold price over $1,600.
You could also get 20X Integra Resources, or over 6X Wallbridge Mining, or 15X Irving Resources or almost two Wesdomes for the same price as First Majestic. Heck, you can even get 2X MAG Silver and more than 2X OceanaGold for the price of First Majestic. Or how about 83X Prime Mining? Food for thought.
Thoughts
Even though I am very bullish on silver prices going forward, silver producers such as First Majestic are obviously way overvalued relative to some gold miners, given the current gold and silver price. With that said, I have no doubt that silver companies can do very well in a raging bull market even though there is already a very large speculation premium in place, in some names (IMHO).
On that note: one can see how many own a particular stock through my swedish broker which is a purely online bank/broker and is the most popular platform for swedish retail:
(The bars in the bottom of the picture represents number of owners)
Now lets compare to one of the most famous gold companies today, Kirkland Lake:
How about Wesdome:
OK, some other gold names just for fun:
- Equinox Gold: 303 owners
- Barrick Gold: 203 owners
- IAMGOLD: 20 owners
- B2Gold: 65 owners
- GT Gold: 7 owners
- Great Bear Resources: 50 owners
- Westhaven Ventures: 13
- Lion One Metals: 38
Now, some more Silver juniors:
- Impact Silver: 131 owners
- Alexco: 115 owners
- Fortuna Silver Mines: 166 owners
- Endeavour Silver: 187 owners
- Southern Silver Exploration: 44 owners
- Bear Creek Mining: 57
…!
Swedish retail is infamous for buying high and selling low (as seen in the Kirkland Lake and Wesdome graph). However, there seems to have been a surprising appetite for First Majest for example even though it’s share performance is nowhere near Kirkland Lake or Wesdome. In fact, it seems that there has been some retail frenzy as of late. The same can be seen for Endeavour Silver:
… In other words: Retail, at least swedish retail, is all over the silver miners at the moment. Furthermore, while ownership in many gold companies seem directly correlated to stock performance, the silver miner ownership has been ramping up no matter what. It even looks to be at or near a peak even though the price of silver recently hit $12(!) while silver producers have been quite hammered as a result. That suggests to me that there is a great retail interest in silver companies which might explain why I see quite a few silver companies trade at (IMHO) outrageous valuations compared to their PROFITABLE brethren also known as gold miners.
Keep in mind that this is just a small sample size from one swedish retail broker. With that said, these dislocations I am seeing are kinda starting to make sense to me. I am not saying that ALL silver companies are overvalued. What I am saying, and have said for quite some time now, is that I personally think many silver companies have a very poor risk/reward profile compared to gold companies. I simply think that some valuations in the silver space looks to already be pricing in silver prices of say $20+ already.
I guess one could say that the silver bugs are very much active in the market right now for what it’s worth. Maybe this is a good sign that the masses might be waking up to the whole FIAT fiasco we are witnessing now? Maybe, maybe not. The swedish retail investors do not seem to be overly attracted to gold companies except perhaps willing to buy high and sell low in runners like Kirkland Lake and Wesdome.
First Mining Gold Corp’s (gold “optionality” play) graph looks like a flat line in stark contrast to most silver plays:
Lastly, I would say that it seems to me that valuations does not make much sense at this moment. Silver companies are popular and there is nothing preventing them from starting to price in a silver price of $25 if silver goes to $18 for example. In other words, I would never short a silver company. They are simply hot right now and that might very well continue.
Note: This is not investment advice!
